Australian Government MID-YEAR ECONOMIC AND FISCAL OUTLOOK 2013-14 (MYEFO) December 2013

8/13/2019 Australian Government MID-YEAR ECONOMIC AND FISCAL OUTLOOK 2013-14 (MYEFO) December 2013

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MID-YEAR ECONOMIC AND

FISCAL OUTLOOK

2013-14

DECEMBER 2013

STATEMENT BY

THE HONOURABLE J. B. HOCKEY MPTREASURER OF THE COMMONWEALTH OF AUSTRALIA

AND

SENATOR THE HONOURABLE MATHIAS CORMANNMINISTER FOR FINANCE OF THE COMMONWEALTH OF AUSTRALIA

FOR THE INFORMATION OF HONOURABLE MEMBERS


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Commonwealth of Australia 2013

ISBN 978-0-642-74951-2

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OtherUsesInquiries regarding this licence and any other use of this document are welcome at:

ManagerCommunications

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InternetA copy of this document is available on the central Budget website at:www.budget.gov.au.

Printed by CanPrint Communications Pty Ltd


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NOTES

(a) The following definitions are used in this Mid-year Fiscal and Economic Outlook(MYEFO):

real means adjusted for the effect of inflation;

real growth in expenses and payments is calculated by the Consumer PriceIndex (CPI) as the deflator;

the Budget year refers to 2013-14, while the forward years refer to 2014-15,

2015-16 and 2016-17; and

one billion is equal to one thousand million.

(b) Figures in tables and generally in the text have been rounded. Discrepancies intables between totals and sums of components are due to rounding:

estimates under $100,000 are rounded to the nearest thousand;

estimates $100,000 and over are generally rounded to the nearest tenth of a

million;

estimates midway between rounding points are rounded up; and

the percentage changes in statistical tables are calculated using unroundeddata.

(c) For the budget balance, a negative sign indicates a deficit while no sign indicates asurplus.

(d) The following notations are used:

- nil

na not applicable (unless otherwise specified)

$m millions of dollars

$b billions of dollars

nfp not for publication

(e) estimates (unless otherwise specified)

(p) projections (unless otherwise specified)

NEC/nec not elsewhere classified


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iv

(e) The Australian Capital Territory and the Northern Territory are referred to as the

Territories. References to the States or each State include the Territories. Thefollowing abbreviations are used for the names of the States, where appropriate:

NSW New South Wales

VIC Victoria

QLD Queensland

WA Western Australia

SA South Australia

TAS Tasmania

ACT Australian Capital Territory

NT Northern Territory

(f) In this paper the term Commonwealth refers to the Commonwealth of Australia.The term is used when referring to the legal entity of the Commonwealth of

Australia.

The term Australian Government is used when referring to the Government andthe decisions and activities made by the Government on behalf of the

Commonwealth of Australia.


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FOREWORD

The Mid-Year Economic and Fiscal Outlook 2013-14 (MYEFO) has been prepared in

accordance with the Charter of Budget Honesty Act 1998. The Charter requires that the

Government provide a mid-year budget report which provides updated information

on the Governments fiscal position.

Consistent with these requirements:

Part 1: Overview contains summary information on the key fiscal and economic

indicators and outlook.

Part 2: Economic outlook discusses the domestic and international economic

forecasts and projections that underpin the budget estimates.

Part 3: Fiscal outlook provides a discussion of the fiscal outlook, in addition to a

summary of the factors explaining variations in the cash flow statement, the

operating statement and the balance sheet since the 2013 Pre-Election Economic and

Fiscal Outlook (PEFO). This part includes discussion of the sensitivity of the budget

estimates to changes in economic parameters, confidence intervals around

forecasts, expenses by function, tax expenditures, payments to the States, and a

debt statement.

Appendix A: Policy decisions taken since the 2013-14 Budget provides details

of decisions taken since the 2013-14 Budget that affect revenue, expense and capitalestimates.

Appendix B: Australian Government Budget Financial Statements provides

financial statements for the general government, public non-financial corporations

and total non-financial public sectors.

Appendix C: Statement of risks provides details of general developments or

specific events that may have an impact on the fiscal position, and contingent

liabilities which are costs the government may possibly face, some of which are

quantified.

Appendix D: Historical Australian Government data provides historical datafor the Australian Governments key fiscal aggregates.


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CONTENTS

FOREWORD .........................................................................................................VPART 1:OVERVIEW.............................................................................................. 1PART 2:ECONOMIC OUTLOOK............................................................................. 7Overview ......................................................................................................................... 7International economic outlook ....................................................................................... 7Domestic economic outlook .......................................................................................... 10Economic projections .................................................................................................... 13PART 3:FISCAL OUTLOOK .................................................................................19Overview ....................................................................................................................... 19Medium term ................................................................................................................. 23Fiscal Strategy ............................................................................................................... 26Budget aggregates ........................................................................................................ 26Underlying cash balance estimates .............................................................................. 28Fiscal balance estimates ............................................................................................... 39Headline cash balance .................................................................................................. 44Commonwealth Government Securities ....................................................................... 45Net debt, net financial worth and net worth ................................................................... 45Structural budget balance ............................................................................................. 47ATTACHMENT A .................................................................................................49Sensitivity of budget estimates to economic developments ......................................... 49ATTACHMENT B .................................................................................................54Confidence intervals around the economic and fiscal forecasts ................................... 54Measures of uncertainty around economic forecasts ................................................... 54Measures of uncertainty around fiscal forecasts ........................................................... 56ATTACHMENT C .................................................................................................59Tax Expenditures .......................................................................................................... 59ATTACHMENT D .................................................................................................60Supplementary expenses table and the Contingency Reserve .................................... 60ATTACHMENT E .................................................................................................65Australias Federal Relations ........................................................................................ 65Overview of payments to the States ............................................................................. 65


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Payments for specific purposes .................................................................................... 66GST and general revenue assistance ........................................................................... 72ATTACHMENT F .................................................................................................76Debt Statement ............................................................................................................. 76Commonwealth Government Securities issuance ........................................................ 76Estimates and projections of CGS on issue .................................................................. 77Drivers of the change in net debt since PEFO .............................................................. 80Breakdown of CGS currently on issue .......................................................................... 82Non-resident holdings of CGS on issue ........................................................................ 84Interest on CGS ............................................................................................................. 85Climate spending........................................................................................................... 87Additional debt disclosures for the 2014-15 Budget ..................................................... 88APPENDIX A:POLICY DECISIONS TAKEN SINCE THE 2013-14BUDGET................. 89Revenue Measures ....................................................................................................... 89Expense Measures ....................................................................................................... 97Capital Measures ........................................................................................................ 197APPENDIX B:AUSTRALIAN GOVERNMENT BUDGET FINANCIAL

STATEMENTS...................................................................................................203Australian Government Financial Statements ............................................................. 204Notes to the general government sector financial statements .................................... 215ATTACHMENT A ...............................................................................................230Financial reporting standards and budget concepts ................................................... 230ATTACHMENT B ...............................................................................................244Australian Loan Council Allocation.............................................................................. 244APPENDIX C:STATEMENT OF RISKS................................................................. 245Overview ..................................................................................................................... 245Details of fiscal risks and contingent liabilities ............................................................ 245Fiscal risks ................................................................................................................... 247Defence ....................................................................................................................... 247Treasury ...................................................................................................................... 248Contingent liabilities quantifiable ............................................................................ 248Communications .......................................................................................................... 248Defence ....................................................................................................................... 249Environment ................................................................................................................ 249


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Foreign Affairs and Trade ........................................................................................... 249Social Services ............................................................................................................ 249Treasury ...................................................................................................................... 250Contingent liabilities unquantifiable ........................................................................ 252Agriculture ................................................................................................................... 252Attorney-Generals ...................................................................................................... 252Communications .......................................................................................................... 252Defence ....................................................................................................................... 253Environment ................................................................................................................ 253Finance ........................................................................................................................ 254Immigration and Border Protection ............................................................................. 254Industry ........................................................................................................................ 255Infrastructure and Regional Development .................................................................. 256Social Services ............................................................................................................ 256Treasury ...................................................................................................................... 257Contingent assets unquantifiable ........................................................................... 259Industry ........................................................................................................................ 259APPENDIX D:HISTORICAL AUSTRALIAN GOVERNMENT DATA............................ 261Data sources ............................................................................................................... 261Comparability of data across years ............................................................................. 261Revisions to previously published data ....................................................................... 262Introduction of the headline cash balance data series ................................................ 263Introduction of the face value of Commonwealth Government Securities on issuedata series ................................................................................................................... 263Deflating real spending growth by the Consumer Price Index .................................... 263


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The deterioration in the budget position since the 2013 PEFO reflects two key factors:

the softer economic outlook; and

essential steps to address unresolved issues inherited from the former government.

Firstly, a softening in the economic outlook has resulted in significantly lower nominalGDP, which has largely driven the reduction in tax receipts by more than $37 billion

over the forward estimates. The softer economic outlook, coupled with changes indemand-driven programmes, has also increased payments across the forward

estimates.

The Australian economy will continue to transition from resources-investment led

growth to broader sources of growth over the forecast period. However, the transitionis now forecast to be slower than at the 2013 PEFO. While the fall in resourcesinvestment is expected to be sharper than previously forecast, the recovery in the

non-resources sector is expected to be more gradual.

As a result, real GDP is forecast to grow at a slower rate of 2 per cent in 2014-15,compared to 3 per cent in the 2013 PEFO. With domestic prices and wages also forecast

to be softer than at the 2013 PEFO, nominal GDP has been revised down significantly.

Table 1.2: Major economic parameters(a)

2013-14 2014-15 2015-16 2016-17

Real GDP 2 1/2 2 1/2 3 3

Employment 3/4 1 1/2 1 1/2 1 1/2

Unemployment rate 6 6 1/4 6 1/4 6 1/4

Consumer Price Index 2 3/4 2 2 1/2 2 1/2

Wage Price Index 2 3/4 2 3/4 4 4

Nominal GDP 3 1/2 3 1/2 4 3/4 4 3/4

Forecasts Projections

(a) Year average unless otherwise stated. Employment, wages and the consumer price index are through

the year growth to the June quarter in 2013-14 and 2014-15. The unemployment rate is the rate for theJune quarter.

Source: Treasury projections.

Secondly, essential steps have been taken to address unresolved issues inherited from

the former Government, which have contributed to the deterioration in the budget

position since the 2013 PEFO.

These steps include providing the Reserve Bank of Australia with a grant to strengthenits capacity to withstand future shocks ($8.8 billion), addressing the funding shortfallfrom the former Governments inadequate provisioning for its policy relating to

offshore processing of illegal maritime arrivals ($1.2 billion), restoring education

funding for Students First A fairer funding agreement for schools ($1.2 billion),Commonwealth provisioning in the Contingency Reserve and relevant revenue heads

related to unfunded superannuation of New South Wales universities, and removing


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the uncertainty associated with the backlog of nearly 100 announced but unlegislated

tax and superannuation measures ($2.9 billion).

The MYEFO takes account of all of the Governments election commitments with the

exception of the saving associated with the 12,000 headcount reduction in the publicservice. The Government remains committed to streamlining the public service, but

will review the timing and approach to implementing its commitment in view of theexpected headcount reduction required by the former governments efficiency

dividends and associated measures. Further decisions on the public service headcount

will be taken in light of the findings of the National Commission of Audit.

Other policy decisions since taking office include providing $995.7 million over

six years to fund eight infrastructure projects that were to be funded from the former

Governments Regional Infrastructure Fund. These productivity-enhancinginfrastructure projects will be co-funded by the states and territories without the failedminerals resource rent tax.

The deterioration in the budget position over the forward estimates is mirrored by amarked deterioration in the projected budget outlook over the medium-term. Without

any policy changes, the budget is projected to be in deficit in each and every yearto 2023-24 and Commonwealth Government Securities on issue would reach$667 billion (around 26 per cent of GDP) in 2023-24.

Projected deficits across the medium-term are the result of strong spending growth

driven by increasing demand for Government services, particularly health. The formerGovernments projections of a surplus of 1 per cent of GDP were underpinned by an

assumption that real spending growth would be limited to 2 per cent per annum whengrowth was at or above trend until that surplus target was reached. Actual averagereal spending growth over the five years to 2012-13 has been almost double that at

around 3.5 per cent.

The 2013-14 MYEFO projects the expected annual average real growth rate in spendingover the medium-term, after the forward estimates, to be 3.7 per cent. With thisunderlying spending growth, the budget would remain in deficit even if tax as a share

of GDP was allowed to grow through fiscal drag (such as income tax bracket creep)with no tax cuts for another 10 years.


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Chart 1.1: Underlying cash balance projected to 2023-24 if no policy change

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-4

-3

-2

-1

0

1

2

3

-5

-4

-3

-2

-1

0

1

2

3

2007-08 2009-10 2011-12 2013-14 2015-16 2017-18 2019-20 2021-22 2023-24

Per cent of GDPPer cent of GDP

Source: Treasury Projections.

The Government is taking concerted action to avoid an unsustainable fiscal

deterioration unfolding. The weaker fiscal and economic outlook highlights theimperative to focus on policies that enhance productivity, improve efficiency and

eliminate wasteful spending, reduce the regulatory burden on businesses andindividuals, and reduce the size of government.

There are two related goals: fostering economic growth, and returning the budget tosurpluses. Stronger economic growth will assist in returning the budget to surplus and

sustainable fiscal policy will promote good macroeconomic outcomes.

The Government is committed to returning the budget to sustainable surpluses thatbuild to at least 1 per cent of GDP by 2023-24.

An essential element in putting in place sustainable fiscal policy settings is the

National Commission of Audit, established by the Government to assess the role andscope of government and the efficiency of government spending. The Commission of

Audit will be guided in its work by the principles that government should:

live within its means;

have respect for taxpayers in the care with which it spends every dollar of

revenue; and

do for people what they cannot do, or cannot do efficiently, for themselves, butno more.

Living within our means requires the elimination of waste, but it will also require

people to adjust to reductions in some spending to which they have become


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accustomed. Only in this way will the Government be able to sustainably fund the

policies that are needed now and in the future.

The Government has already commenced the process of identifying savings by

reversing some of the poor decisions taken by the former Government to yield savingsof around $1.1 billion over the forward estimates.

The MYEFO also demonstrates the Governments commitment to greater transparencyand includes a revised economic projection methodology and assumption.

It introduces additional information compared to past budget documents,including detailing the headline cash balance, the inclusion of confidence intervals

for forecasts, and a structural budget balance discussion.

A comprehensive Debt Statement detailing current and projected CommonwealthGovernment Securities on issue is included at Attachment F.

It incorporates a revised assumption for the unemployment rate over the projection

period and a new methodology for projecting the terms of trade over themedium-term. To better align the projected unemployment rate for 2015-16 and

2016-17 with the assumption for real GDP and the output gap, the unemploymentrate is now assumed to remain at its last forecast level of 6 per cent in thetwo projection years. The new methodology for projecting the terms of trade

involves a more detailed assessment of volumes and prices for major export

categories.


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PART 2:ECONOMIC OUTLOOK

OVERVIEW

Since the 2013 PEFO there has been a substantial deterioration in the domestic outlookfor both real and nominal GDP growth. The Australian economy is expected totransition from resources to non-resources drivers of growth. But this transition is

likely to be slower than previously forecast. Resources investment is expected to fall

more sharply, while activity in the non-resources sectors has been subdued, withpositive signs in those sectors thus far limited largely to the established housing

market, above average measures of consumer sentiment and improving businesssentiment. Despite this, sustained low interest rates, particularly if combined with

further falls in the exchange rate, should support a recovery across the economy morebroadly.

Forecast wage growth has also been revised lower, further weighing on forecastnominal GDP and, in turn, forecast tax receipts and the budget position.

The softness in the non-resources sectors of the economy is weighing on the labour

market. Employment growth remains subdued, and the unemployment rate is forecastto rise to 6 per cent by mid-2015. The participation rate is falling as older workers

leave the workforce and younger workers delay their entry. Wages are growing well

below previous expectations while weighing on household income, this will assistin supporting employment.

The outlook for global growth is subdued, although growth is expected to accelerate

over the forward estimates.

The weaker outlook for real GDP growth, coupled with the softer outlook for wage

and domestic price growth, has resulted in a substantial downward revision to forecast

nominal GDP growth in 2014-15. Higher-than-expected iron ore and other keycommodity prices are providing some near-term support to nominal GDP growth.However, the strength in commodity prices is expected to be temporary, with a large

increase in supply expected to drive prices lower over the forecast period and beyond.

INTERNATIONAL ECONOMIC OUTLOOK

Global growth remains subdued but is expected to pick up across the forward

estimates. World GDP is expected to grow by 2 per cent in 2013, well below trend,

before picking up gradually to 3 per cent in 2014 and 3 per cent in 2015 (Table 2.1).

Forecast growth in Australias major trading partners (MTPs) is largely unchangedfrom the 2013 PEFO, and is expected to remain solid at 4 per cent in 2013 and

4 per cent in both 2014 and 2015. A gradual improvement in Europe and theUnited States is expected to lead to an increase in external demand flowing through to


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Chinas growth, to Australias other MTPs in Asia, and to the global economy. Higher

growth forecasts for Australias MTPs compared with the global economy reflect theincreasing weight of fast-growing Asian emerging market economies in our MTPs.

Table 2.1: International GDP growth forecasts(a)

Actuals

2012

PEFO MYEFO PEFO MYEFO PEFO MYEFO

China(b) 7.7 7 1/4 7 3/4 7 1/2 7 1/2 7 1/2 7 1/4

India(b) 3.8 5 2 3/4 6 1/2 4 3/4 6 1/2 5 1/4

Japan 1.9 1 3/4 1 3/4 1 1 1/4 1 1

United States 2.8 1 1/2 1 3/4 2 1/2 2 1/2 2 1/2 2 3/4

Euro area -0.6 - 3/4 - 1/2 3/4 3/4 1 1/4 1 1/4

Other East Asia(c) 3.9 3 3/4 3 3/4 4 3/4 4 1/2 5 4 3/4

Major trading partners 4.1 4 4 1/4 4 1/2 4 1/2 4 3/4 4 1/2

World 3.2 3 2 3/4 3 3/4 3 1/2 4 3 3/4

Forecasts

2013 2014 2015

(a) World, euro area and other East Asia growth rates are calculated using GDP weights based on

purchasing power parity (PPP), while growth rates for major trading partners are calculated using exporttrade weights.

(b) Production-based measure of GDP.(c) Other East Asia comprises the newly industrialised economies (NIEs) of Hong Kong, South Korea,

Singapore and Taiwan and the Association of Southeast Asian Nations group of five (ASEAN-5), whichcomprises Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

Source: National statistical agencies, IMF World Economic Outlook October 2013, Thomson Reuters andTreasury.

For China, the outlook has improved and stabilised. Economic growth strengthened to

7.8 per cent through the year to the September quarter 2013, partly reflecting the

increase in state-supported infrastructure spending that was introduced in the middleof the year. Accordingly, the forecast for 2013 has been revised up to 7 per cent.

Continued solid growth is expected for China over the forecast horizon, but Chinaslong-term prospects depend on whether authorities can successfully implement

necessary structural reforms, including those related to the financial system. While

supporting economic growth in 2013, state-led investment is expected to progressivelygive way to a more market-driven system of allocating capital, consistent with recentpolicy announcements by the Chinese authorities at their Third Plenum. Although

likely to improve Chinas long-term growth prospects, these market-oriented reformsand the transition away from state-led investment are expected to weigh on aggregate

investment in the near term, with economic growth forecast to moderate to 7 per cent

in 2014 and 7 per cent in 2015.

The prospect of far-reaching economic reforms in China also raises the risk of a policymisstep by the authorities, as they try to overcome economic and political difficulties

in implementing their agenda. Meanwhile, the possibility of a sharp rise in bad loansfollowing the very large and rapid credit expansion in recent years and poor outcomes

in advanced economies present continuing risks to Chinas growth outlook.

The United Stateshas continued its modest but steady recovery and, barring furtheradverse developments, is poised for stronger economic outcomes. In the short term,


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the recent fiscal impasse had only a minor impact on the recovery and the

10 December announced budget deal, while small in scale, will most likely avertanother shutdown in 2014. Of more concern is the continued uncertainty around fiscal

policy, which has raised questions about the ability of the United States political

system to compromise to achieve workable solutions to longer-term fiscal challenges.

The strength of economic data over coming months will eventually determine the startdate for tapering of the United States Federal Reserves Asset Purchase Program. The

normalisation of monetary policy is likely to be accompanied by financial marketadjustments which could be beneficial to other countries but may also produce

volatility, particularly for emerging markets. However, a stronger United Stateseconomy will be beneficial for the global economy. Part of the challenge for policy

makers is managing expectations, particularly given the previous wrong-footing of

market expectations of a September start date for tapering of the Asset PurchaseProgram.

The euro areahas been experiencing some respite, with the most sustained period offinancial market calm since the start of the crisis. This has been accompanied by some

encouraging data including, in the June quarter 2013, the first positive GDP growth

after six consecutive quarters of contraction.

Still, the outlook for the euro area remains subject to considerable risk. In reaffirmingits accommodative monetary policy stance, and cutting its key policy rate in early

November, the European Central Bank characterised the recovery as weak, fragile anduneven. The euro area unemployment rate remains at a record high, credit conditions

remain tight, and fiscal consolidation will continue to weigh on growth. The bankingsector is a persistent vulnerability, and the banking union remains a long-term project

beset by political differences. The comprehensive assessment of euro area banks, inparticular the Asset Quality Review, led by the European Central Bank and due to be

completed by October 2014, could lead to a re-escalation of the regions crisis if it is notseen as credible or reveals serious concerns about the viability of euro area banks while

policy responses remain inadequate. While broadly factored in by markets, theprospect of further Greek debt restructuring could reignite euro area political tensions

and raise global financial market volatility.

InJapan, the short-term outlook has been substantially boosted by fiscal and monetarystimulus, but a sustained recovery relies on structural reforms to lift long-term growth.

While the initial tranche of the Japanese Governments structural reforms has beenlegislated, its benefits and the prospects for further reform remain unclear.

A looming challenge for Japan will be supporting growth and confidence in therecovery following the increase in the consumption tax in April 2014. While the tax

increase is accompanied by fiscal stimulus and makes an important contributiontowards longer-term fiscal consolidation, there is uncertainty around its near-term

impact on the economy. Further quantitative easing from the Bank of Japan could also


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be in prospect if needed to support growth and meet its 2 per cent inflation target

in 2015.

Since May, expectations that the United States Federal Reserve would soon begin to

taper its asset purchase program have led to large capital outflows and currencydepreciation in a number of emerging market economies. Economies with large

current account deficits and a large presence of foreign investors in their equity andbond markets, like India and Indonesia, have been particularly affected. While the

impact has been manageable to date, and there has been some relief with the delay intapering, risks remain.

Amid these developments, there has been a reassessment of the medium-term growth

prospects of emerging market economies. India in particular faces structural

impediments to growth and much needed private investment. In conjunction with thesubdued global environment and weak growth outcomes, this has led to largedownward revisions to Indian growth across the forecast period. Solid monsoon rains

and improving net exports may underpin a modest recovery in India but, given globalvolatility, significant downside risks remain. While ASEAN economies also face tight

financial conditions and structural impediments to growth, a gradual pickup in

exports to advanced economies and relatively resilient domestic demand and policysettings are expected to support continued growth at reasonably robust levels.

DOMESTIC ECONOMIC OUTLOOK

Since the 2013 PEFO, there has been a significant downgrade to forecast nominal GDP

growth, reflecting lower forecast growth in the real economy, wages and domesticprices. The downward revision to forecast nominal GDP growth flows through tolower forecast tax receipts and a further deterioration in the budget bottom line.

The Australian economy is forecast to grow by 2 per cent in both 2013-14 and 2014-15as it transitions from resources to non-resources drivers of growth. This transition isunlikely to be seamless, with data since the 2013 PEFO suggesting a

slower-than-anticipated recovery in the non-resources sectors of the economy and a

sharper decline in resources investment over the forecast period. As a consequence,employment growth is expected to remain subdued, and wage growth is forecast to

remain well below trend. The implied forecasts for calendar year 2013 and 2014 are

broadly consistent with Consensus forecasts and the IMF (Charts 2.1 to 2.4).

The key driver of economic growth in recent years has been very strong resources

investment. Over the past decade, investment in the resources sector has more than

quadrupled as a share of GDP and the capital stock is now three times larger. Thelatest Private New Capital Expenditure and Expected Expenditure (CAPEX) survey

suggests that resources investment will remain at elevated levels in 2013-14, supportedby investment in Liquefied Natural Gas (LNG) projects. However, from 2014-15,resources investment is expected to start sharply detracting from growth. The forecast


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decline in resources investment is now steeper than it was at the 2013 PEFO, with the

sector having become increasingly focused on containing costs.

With the resources boom continuing its transition to the production phase, resources

exportswill begin to make up a greater share of real GDP growth. Already, they aremaking a sizeable contribution to growth, underpinned by rapidly expanding iron ore

supply. LNG exports should also make a significant contribution to export growthfrom around the middle of the decade.

While resources exports will grow strongly over the forecast period, activity outsidethe resources sector will need to increase to fill the gap created by falling resources

investment. Recovering global economic growth, low interest rates and a somewhatlower exchange rate will support this recovery. There are signs that confidence is

picking up in the business sector, including in the National Australia Banks indicatorof business confidence and other private sector business surveys.

Nevertheless, this is yet to be fully reflected in current levels of activity and businessinvestment has been downgraded since the 2013 PEFO. Businesses in the

non-resources sectors are continuing to exercise caution in their investment decisions.While the latest CAPEX data suggest that investment intentions in the non-resources

sectors of the economy have improved in recent months, firms outside of the resourcessectors only expect to invest around the same amount (in nominal terms) as they did in

2006-07.

Dwelling investment has also been weaker than expected at the 2013 PEFO, with

investment falling unexpectedly in the September quarter. Still, established houseprices, auction clearance rates, and new dwellings approvals have all grown stronglyrecently, and suggest a pick-up in investment in coming months. Finance

commitments for new dwellings are now 12.4 per cent higher than a year ago and

building approvals have improved noticeably from their trough in early 2012. Higherhouse prices could initiate a stronger investment response, in part by encouraging the

development of existing land holdings. Suggestions of risks emanating from anover-exuberant housing sector remain premature.

With the slower-than-expected recovery in the non-resources sectors, employment

growthacross the economy remains subdued. Forecast employment growth has been

revised down to of a per cent through the year to the June quarter 2014, but is stillexpected to strengthen in 2014-15, supported by lower forecast wage growth and the

additional incentive this creates for firms to employ workers. The unemployment rateis expected to drift up to 6 per cent by the June quarter of 2015.

The recent rise in the unemployment rate has been limited by the fall in the

participation rate. The fall in the participation rate reflects both demographic factors

as the first of the baby-boomer generation reach retirement age and a discouragedworker effect, with some younger workers opting out of the difficult search for workin the non-resources sectors of the economy.


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Forecast wage growthhas been revised down to 2 per cent through the year to the

June quarters of both 2014 and 2015. Wage flexibility is an important adjustmentmechanism that supports employment during periods of slower economic growth. The

current environment of slow wage growth is the flip side of the experience in the

mid-2000s when wages grew strongly and capacity constraints emerged as theresources investment boom gathered steam. The subdued outlook for employment andwage growth means that total compensation of employees is expected to continue

growing at its slowest rate since the early 1990s.

Slowing wage growth and household concerns around rising unemployment are

restraining consumer spending, though growth in household consumption has beensupported by growth in household wealth as house and equity prices rise. Still, with

wages growing, in through the year terms, at their slowest rate since the March quarter

2000, forecast growth in consumer spending in 2013-14 has been revised lower to2 per cent.

The household saving ratio has remained high relative to the period immediately

before the global financial crisis, and it is clear that there has been a structural increasein household savings. The household saving ratio is forecast to drift down a little over

the forecast period, but remain well above levels seen before the global financial crisis.There is a risk of weaker consumption spending should households continue to save at

current levels.

The easing in wage growth and softness in the non-resources sectors is helping to

contain inflationary pressure. Headline and underlying inflationare expected to be2 per cent through the year to the June quarter of 2014.

Domestic price growth is expected to remain well below average over the forecast

period, consistent with weak wage growth and ongoing competitive pressure,

particularly in the traded sectors.

Forecasts of the terms of tradehave been revised a little higher in the near-term, with

robust industrial production in China supporting commodity prices, in particular ironore. Despite this, over coming years, prices for Australias key commodity exports areexpected to ease, in line with growing world supply.

The removal of the carbon tax is expected to lower headline and underlying inflationby less than of a percentage point in 2014-15, relative to the 2013 PEFO, which hadfactored in the previous Governments policy of moving to a carbon trading system.The removal of the carbon tax is also expected to support household consumption

growth in the short term and make a small contribution to national income growthover the longer term.

Forecast nominal GDP growth has been revised lower since the 2013 PEFO. This

reflects the weaker outlook for real GDP, wages and domestic prices. Nominal GDP isexpected to grow by 3 per cent in 2013-14 and 3 per cent in 2014-15.


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13

There is always a degree of uncertainty around the forecasts, which can be estimated

based on past forecast errors and presented using confidence intervals. The averageannualised real GDP growth rate over the two years 2012-13 to 2014-15 is expected to

be 2 per cent, with the 70 per cent confidence interval ranging from 1 to

3 per cent. Nominal GDP growth forecasts carry with them additional uncertainty.The 70 per cent confidence interval for average annual nominal GDP growth over theforecast period ranges from 2 per cent to 5 per cent. Attachment B of Part 3 provides

further detail on the confidence intervals around the forecasts.

There are some clear risks to the domestic outlook. Should the pace of rebalancing

toward non-resources drivers of growth disappoint further, real GDP growth andemployment growth will be weaker and the unemployment rate higher. The

anticipated fall in resources investment could also be sharper than expected, requiring

a greater contribution from the non-resources sectors to maintain forecast real GDPgrowth.

Other risks could result in stronger outcomes. The non-resources sectors could

rebound more quickly than expected in response to continued low interest rates or afurther depreciation of the Australian dollar. Australian exports may be stronger than

anticipated if global growth surprises on the upside, or if resources production rampsup more quickly than expected.

Economic projections

The fiscal aggregates are underpinned by a set of forward estimates consisting of

short-term forecasts and two years of projections based on medium-term trends ratherthan two years of detailed forecasts. Real GDP is projected to grow at its trend rate of

around 3 per cent a year over the medium term in line with underlying trends inemployment and productivity, though there is a higher than usual risk of below-trend

growth in 2015-16 given resources investment is expected to sharply detract fromgrowth. Inflation is projected to be 2 per cent, the mid-point of the Reserve Bankstarget band.

As is standard practice, forecast methodologies and projection assumptions are

reviewed from time to time. In this MYEFO, a new assumption for the projectedunemployment rate has been adopted and a new methodology for the terms of trade

has been developed.

At the end of the forecast period (2014-15), the level of GDP is forecast to be belowpotential GDP (a negative output gap), and the unemployment rate is forecast to

exceed the non-accelerating inflation rate of unemployment (NAIRU). The projection

assumption of real GDP growing at trend means the output gap remains unchangedover the projection period. To better align the projected unemployment rate in 2015-16and 2016-17 with the assumption for real GDP and the output gap, the unemployment


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14

rate is now assumed to remain at its last forecast level of 6 per cent in the

two projection years.1

This new assumption for the projected unemployment rate increases the number of

unemployment benefit recipients in the projection period and contributes to thedeterioration in the budget bottom line since the 2013 PEFO by $3.7 billion over the

forward estimates.

The revision to the terms of trade methodology is outlined in Box A.

1 The projection methodology is currently being reviewed with consideration being given toextending the forecast period. A longer forecast period would allow for a more realisticapproach to closing output gaps than is available under the current projection methodology.


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15

Table 2.2: Domestic economy forecasts(a)

Outcomes(b)

2012-13

PEFO MYEFO PEFO MYEFO

Panel A - Demand and output(c)

Household consumption 2.0 2 1/2 2 3 2 3/4

Private investment

Dwellings -0.4 5 3 5 1/2 5 1/2

Total business investment(d) 6.1 1 1/2 -1 1/2 - 1/2 -2

Non-dwelling construction(d) 13.8 1 -1 1/2 -4 1/2 -7

Machinery and equipment(d) -4.3 1/2 -4 1/2 3 4 1/2

Private final demand(d) 2.8 2 1/4 1 1/4 2 1/2 1 3/4

Public final demand(d) -1.3 3/4 1 1 1

Total final demand 1.9 2 1 1/4 2 1 1/2

Change in inventories(e) -0.3 0 0 0 0

Gross national expenditure 1.6 2 1 1/4 2 1 1/2Exports of goods and services 6.0 6 1/2 5 7 6 1/2

Imports of goods and services 0.3 4 -1 3 2

Net exports(e) 1.2 1/2 1 1/4 1 1

Real gross domestic product 2.7 2 1/2 2 1/2 3 2 1/2

Non-farm product 2.8 2 1/2 2 1/2 3 2 1/2

Farm product -3.9 4 2 1 1

Nominal gross domestic product 2.5 3 3/4 3 1/2 4 1/2 3 1/2

Panel B - Other selected economic

measures

External accounts

Terms of trade -9.8 -5 3/4 -5 -3 3/4 -5

Current account balance

(per cent of GDP) -3.6 -3 3/4 -3 3/4 -3 3/4 -4

Labour market

Employment(f) 1.3 1 3/4 1 1/2 1 1/2

Unemployment rate (per cent)(g) 5.6 6 1/4 6 6 1/4 6 1/4

Participation rate (per cent)(g) 65.3 65 1/4 64 3/4 65 1/4 64 3/4

Prices and wages

Consumer price index(h) 2.4 2 1/2 2 3/4 2 2

Gross non-farm product deflator -0.3 1 1/4 1 1 1/4 3/4

Wage price index(f) 2.9 3 1/4 2 3/4 3 1/4 2 3/4

Forecasts

2013-14 2014-15

(a) Percentage change on preceding year unless otherwise indicated.(b) Calculated using original data unless otherwise indicated.(c) Chain volume measures except for nominal gross domestic product which is in current prices.(d) Excluding second-hand asset sales from the public sector to the private sector.(e) Percentage point contribution to growth in GDP.(f) Seasonally adjusted, through-the-year growth rate to the June quarter.

(g) Seasonally adjusted rate for the June quarter.(h) Through-the-year growth rate to the June quarter.Source: ABS cat. no. 5206.0, 5302.0, 6202.0, 6345.0, 6401.0, unpublished ABS data and Treasury.

Note: The forecasts are based on several technical assumptions. The exchange rate is assumed to remainaround its recent average level a trade-weighted index of around 70 and a United States dollar exchangerate of around 91 US cents. Interest rates are assumed to move in line with market expectations. World oilprices (Malaysian Tapis) are assumed to remain around US$118 per barrel. The farm sector forecasts arebased on an assumed return to average seasonal conditions.


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Chart 2.1: Consensus real GDP

forecasts for calendar year 2013

Chart 2.2: Consensus real GDP

forecasts for calendar year 2014

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-13 Jun-13 Nov-13

Per centPer cent

BudgetPEFO

IMF OctoberWEO

MYEFO

IMF April WEO

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


Per centPer cent

Budget PEFO

IMF OctoberWEO

MYEFO

IMF April WEO

Note: The top and bottom lines represent range of Consensus forecasts. The centre line representsConsensus mean forecast.Source: Consensus Economics and Treasury.

Chart 2.3: Consensus unemploymentrate forecasts for calendar year 2013

Chart 2.4: Consensus unemploymentrate forecasts for calendar year 2014

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0


Per centPer cent

Budget

PEFO

MYEFO

IMF AprilWEO

IMF OctoberWEO

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0


Per centPer cent

Budget

PEFO MYEFO

IMF AprilWEO

IMF OctoberWEO

Note: The top and bottom lines represent range of Consensus forecasts. The centre line representsConsensus mean forecast.Source: Consensus Economics and Treasury.


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Box A: Medium-term projection of the terms of trade

A new methodology for projecting theterms of trade over the medium termhas been adopted in MYEFO (Chart 1).Since the 2010-11 Budget, the terms oftrade have been assumed to fall by20 per cent over 15 years from thebeginning of the projection period.This approach was silent on when theexpected decline would end and thelevel they would settle at in the longrun.

The new methodology takes intoaccount the three phases of the miningboom. The initial demand phase overwhich there was a rapid rise in pricesand a modest increase in supply; thecurrent supply phase during which thecapacity built over the demand phaseis employed thereby rapidly increasingsupply and lowering prices; and anexpected balanced growth phase (orlong-run path) where demand and

supply are expected to move together,and the terms of trade display nosecular trend.

The new methodology is based on abottom-up forecasting framework.Each element of the terms of trade(that is, trade volumes and prices formajor export categories) has beenmodelled using extensions of existingshort-run econometric forecastingmodels, expert advice and credible

publicly available information. Acritical element of the framework ismodelling the evolving global demandand supply balance for the three majorbulk commodities (iron ore,metallurgical coal and thermal coal).

This framework suggests the supplyphase will end around 2017-18 with thelong-run terms of trade settling aroundtheir level in 2006-07. There are anumber of downside risks to thisoutlook including uncertainty aroundthe global economy, the nominalexchange rate and non-bulkcommodity price forecasts. Applyingprudent judgement to the modelsoutcome results in a long-run terms of

trade that settles at the level observedin 2005-06 by 2019-20.

This change reduces nominal GDPgrowth in the projection period andcontributes to the deterioration in thebudget bottom line since the 2013 PEFOby $2 billion over the forwardestimates.

Chart A: Projections of Australiasterms of trade

30

50

70

90

110

30

50

70

90

110

1959-60 1994-95 2029-30

Index (2011-12 = 100)

PEFO

MYEFO

Source: ABS cat. no. 5204.0 and Treasury.


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Part 3: Fiscal outlook

20

The financial implications of the Governments election commitments are fully

incorporated in this MYEFO, with the exception of the commitment to reduce theheadcount of the Australian Public Service (APS) by 12,000. This commitment will be

reviewed in light of the findings of the National Commission of Audit. The

Government remains committed to streamlining the public sector in the context of theexpected headcount reduction implicit in the former Governments efficiencydividends and associated measures.

Resolving legacy issues from the former Government

In this MYEFO, the Government has taken a number of revenue and spending

decisions and included provisioning in the Contingency Reserve (for expenses) or

against relevant revenue heads, to deal with a number of unfunded policy issuesinherited from the former Government.

The largest financial impact relates to the decision to provide the Reserve Bank of

Australia with an $8.8 billion grant to rebuild its reserve fund to a level deemedprudent by the Reserve Bank Board. This will enhance the Reserve Banks capacity to

conduct its monetary policy and foreign exchange operations.

Other legacy issues where additional costs have been incurred include the following:

Addressing the uncertainty for businesses and households associated with thebacklog of 92 announced but unlegislated tax and superannuation measures will

cost $2.9 billion over the forward estimates. The Government has reviewed the

measures and has decided to proceed with 34 measures as announced, not toproceed with 55 measures, and to proceed with three measures with amendment.

Restoring funding for schools to the level announced in the 2013-14 Budget byproviding $1.2 billion in funding across the forward estimates for Queensland,

Western Australia, and the Northern Territory for Students First A fairer funding

agreement for schools.

A funding shortfall of around $1.2 billion over the forward estimates inherited from

the former Governments inadequate provisioning for its offshore processing policyfor illegal maritime arrivals.

Commonwealth provisioning in the Contingency Reserve and relevant revenueheads related to unfunded superannuation liabilities of New South Wales

universities.

Provisioning in the Contingency Reserve for the unfunded redundancies associatedwith the reduction of 14,473 APS staff implicit in the former Governments policy

settings.

The Government has also identified agencies with critical funding shortfalls for their

operations or capital requirements, such as the Australian Competition and Consumer


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21

Commission, and is taking steps to review these agencies comprehensively and

develop solutions to place them on a more sustainable operational footing. Theoutcomes of this work will be outlined in the 2014-15 Budget.

The significant pressures on the budget continue immediately beyond the forwardestimates, where large demand-driven programmes begin to ramp-up significantly.

This is particularly evident beyond 2016-17 in funding for official developmentassistance, the National Disability Insurance Scheme, and Students First A fairer

funding agreement for schools (Chart 3.1 below).

Chart 3.1: Payments for official development assistance (ODA), the NationalDisability Insurance Scheme (NDIS), and Students First projected from 2013-14

to 2019-20

0

2

4

6

8

10

12

0

2

4

6

8

10

12

ODA NDIS Students First

$billion$billion

2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Note: Over the forward estimates official development assistance is grown in line with inflation, consistentwith the Governments election commitment. The medium-term projections for official developmentassistance assume a return to the former Governments target of 0.5 per cent of gross national income from2017-18. The projections for Schools First assume all States and Territories participate and there are nochanges to the former Governments policy except those announced publicly on 2 December 2013. Theprojections for NDIS are based on the current policy.Source: Treasury projections

Delivering on the Governments election commitments

The Governments election commitments have been fully accounted for in the

2013-14 MYEFO with the exception of savings from reducing the size of APS. Taken

together, with potential savings from streamlining the APS, there would be a positiveimpact on the budget position.

With regard to key election commitments included as decisions in the MYEFO,legislation to repeal the carbon tax was introduced into Parliament on13 November 2013. Repealing this tax will reduce cost pressures on households and


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22

businesses, and is consistent with the Governments plan for a stronger economy built

on lower taxes, less regulation and a stronger private sector.

The total impact of the repeal of the carbon tax and associated measures is a net

deterioration in the budget of $7.4 billion over the forward estimates period. This costreflects, in part, the Governments decision to retain the current personal income tax

rates while abolishing the carbon tax, and to maintain the increases in fortnightlypensions and benefit rates that were introduced with the carbon tax.

Legislation to repeal the minerals resource rent tax was also introduced intoParliament on 13 November 2013. The Bill also repeals or revises a number of related

measures, the costs of which were intended to be met by revenue from the mineralsresource rent tax, including the company tax loss carry-back arrangements, Schoolkids

Bonus, the Regional Infrastructure Fund and the Regional Development AustraliaFund, and the superannuation guarantee charge increase. The total value of measures

in the Bill is $13.4 billion over the forward estimates.

An important element of repairing the budget position is to boost growth and

productivity. Accordingly, the Government is embarking on an ambitiousinfrastructure investment programme through the Auslink Programme to fast track

essential projects and increase funding so that we can start building the transportinfrastructure that Australia needs for the 21st century.

This Government will provide an additional $8.2 billion over six years, bringing thetotal land transport infrastructure investment from 2013-14 to 2018-19 to $34.5 billion.

Significant projects being funded under the Auslink Programme to meet theGovernments election commitments include East-West Link in Melbourne,WestConnex in Sydney, the Toowoomba Second Range Crossing and Melbourne to

Brisbane Inland Rail. These projects will help to alleviate congestion in our cities, link

our regions, improve safety across our road network and underpin businessproductivity.

Commitments where details are yet to be finalised have been provisioned for in theContingency Reserve and related revenue heads as estimates variations. This isconsistent with the treatment of outstanding election commitments in the MYEFO

following the 2004 and the 2010 Federal elections. These commitments will be detailed

in the 2014-15 Budget.

The election commitment that has not been incorporated into MYEFO is the $5.2 billionsaving from reducing the public sector headcount by 12,000 through natural attrition.

Other policy decisions

The Government will provide $996 million over six years for eight infrastructure

projects previously funded from the former Governments Regional Infrastructure

Fund. The Government will fund these productivity-enhancing infrastructure projects


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23

without the minerals resource rent tax. These projects include the Great Northern

Highway Muchea to Wubin and the North West Coastal Highway Minilya toBarradale, which will be co-funded by the States and Territories.

The Government has begun the process of identifying responsible savings as a downpayment towards repairing the budget. A net save of $1.1 billion over the forward

estimates will be achieved from not proceeding with various uncommitteddiscretionary grants or spending commitments announced by the former Government

in the 2013 Economic Statement or before the 2013 PEFO, while accepting most of theoffsetting saves identified as part of these spending packages.

In addition, the Government has begun a process to streamline government andreduce duplication, starting with the abolition or rationalisation of over

20 non-statutory bodies where activities are no longer needed or can be managedwithin existing departmental resources.

MEDIUM TERM

The deterioration in the financial position of the Commonwealth over the forward

estimates since the 2013 PEFO is mirrored in a marked deterioration in the projectedunderlying cash balance over the medium term, in the absence of remedial action.

Without policy change, average annual real expenditure growth of 3.7 per cent is

projected over the period from 2016-17 to 2023-24. Even if it is assumed that tax as ashare of GDP was allowed to grow through fiscal drag, including income tax bracket

creep (see Chart 3.2 below), the budget would remain in deficit in every year through

to 2023-24 (see Chart 3.3 below).


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Chart 3.2: Payments and receipts projected to 2023-24

20

22

24

26

28

20

22

24

26

28

2007-08 2009-10 2011-12 2013-14 2015-16 2017-18 2019-20 2021-22 2023-24


Payments Receipts

Payments

Receipts

Note: Payments and receipts exclude Future Fund payments and earnings, which are also not included inthe underlying cash balance.Source: Treasury projections.

Chart 3.3: Underlying cash balance projected to 2023-24

-5

-4

-3

-2

-1

0

1

2

3

-5

-4

-3

-2

-1

0

1

2

3

2007-08 2009-10 2011-12 2013-14 2015-16 2017-18 2019-20 2021-22 2023-24


Underlying cash balance Note: The underlying cash balance excludes Future Fund earnings and payments.Source: Treasury projections.

If tax cuts were provided in order to return fiscal drag, including income tax bracket

creep, and prevent average tax rates increasing, the budget would produce even largerdeficits over the medium term to 2023-24. In addition to growing the economy, thishighlights that the heavy lifting to achieve a surplus must come through expenditure


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FISCAL STRATEGY

The Government has inherited a budget in significant need of repair.

Undertaking systemic fiscal repair to return the Budget to surplus and to reduce debt

is a key election commitment of the Government.

The Government has a clear plan to deliver on this commitment.

The Government has committed to restoring public sector finances by returning the

budget to sustainable surpluses that build to at least 1 per cent of GDP by 2023-24.

The Government has established the National Commission of Audit to assess the role

and scope of Government, as well as ensuring taxpayers money is spent wisely and inan efficient manner. The Commission will provide its Phase 1 report to Government atthe end of January and Phase 2 report at the end of March 2014. The recommendationsof the National Commission of Audit will provide the platform for the 2014-15 Budget

for reducing government spending.

At the same time, it is critical that Australia lifts its potential rate of economic growth

and productivity in order to deliver sustained growth in living standards over thedecades ahead. Quality investments in infrastructure, significant reductions in red tape

and a system of government that encourages innovation will support productivitygrowth and, in turn, stronger economic growth.

Consistent with the requirements of the Charter of Budget Honesty Act 1998, theGovernment will outline the full detail of its medium-term fiscal strategy in the

2014-15 Budget.

BUDGET AGGREGATES

The underlying cash deficit is expected to be $47.0 billion (3.0 per cent of GDP) in

2013-14, improving to a deficit of $17.7 billion (1.0 per cent of GDP) in 2016-17. Inaccrual terms, the fiscal balance deficit is expected to be $41.8 billion (2.7 per cent of

GDP) in 2013-14, improving to a deficit of $14.5 billion (0.8 per cent of GDP) in 2016-17.

Net debt is expected to be $191.5 billion (12.1 per cent of GDP) in 2013-14 and isexpected to reach $280.5 billion (15.7 per cent of GDP) in 2016-17.

The face value of Commonwealth Government Securities on issue is expected to riseover the forward estimates to a within-year peak of around $460 billion in 2016-17.


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Table 3.2: Australian Government general government sector budget aggregates


$b $b $b $b

Receipts 369.5 364.9 390.3 382.7

Per cent of GDP 23.6 23.1 23.9 23.5

Payments(a) 396.6 409.0 411.3 413.7

Per cent of GDP 25.3 25.9 25.1 25.4

Net Future Fund earnings 2.9 2.9 3.0 3.0

Underlying cash balance(b) -30.1 -47.0 -24.0 -33.9

Per cent of GDP -1.9 -3.0 -1.5 -2.1

Revenue 379.9 373.9 397.7 387.9

Per cent of GDP 24.2 23.7 24.3 23.8

Expenses 401.5 412.1 416.0 417.8Per cent of GDP 25.6 26.1 25.4 25.6

Net operating balance -21.5 -38.1 -18.2 -29.9

Net capital investment 4.0 3.7 3.8 1.6

Fiscal balance -25.5 -41.8 -22.1 -31.5

Per cent of GDP -1.6 -2.7 -1.3 -1.9

Memorandum item:

Headline cash balance -37.2 -51.6 -33.6 -42.4


$b $b $b $b

Receipts 423.4 409.1 450.8 432.8

Per cent of GDP 24.6 24.0 24.8 24.2

Payments(a) 424.9 430.0 443.2 447.1

Per cent of GDP 24.6 25.2 24.4 25.0

Net Future Fund earnings 3.2 3.1 3.4 3.4

Underlying cash balance(b) -4.7 -24.1 4.2 -17.7

Per cent of GDP -0.3 -1.4 0.2 -1.0

Revenue 433.3 417.4 464.6 445.0

Per cent of GDP 25.1 24.4 25.6 24.9

Expenses 430.9 436.0 454.5 457.1

Per cent of GDP 25.0 25.5 25.0 25.6

Net operating balance 2.4 -18.6 10.1 -12.1

Net capital investment 0.5 0.2 2.3 2.4

Fiscal balance 1.8 -18.8 7.8 -14.5

Per cent of GDP 0.1 -1.1 0.4 -0.8

Memorandum item:


Estimates

2013-14 2014-15

Projections

2015-16 2016-17

(a) Equivalent to cash payments for operating activities, purchase of non-financial assets and net acquisition

of assets under finance leases.(b) Excludes expected net Future Fund earnings.


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Underlying cash balance estimates

The 2013-14 underlying cash deficit is expected to be $28.9 billion larger than expectedin the 2013-14 Budget, and $16.8 billion larger than expected in the 2013 PEFO.

Table 3.3: Summary of Australian Government general government sector cashflows

(a)

PEFO MYEFO PEFO MYEFO$b $b $b $b

Cash receiptsOperating cash receipts 369.0 364.5 388.1 380.5

Capital cash receipts(b) 0.4 0.4 2.2 2.3

Total cash receipts 369.5 364.9 390.3 382.7

Cash payments

Operating cash payments 386.8 398.7 401.4 403.5Capital cash payments(c) 9.4 9.9 10.0 10.2

Total cash payments 396.2 408.6 411.3 413.7

Finance leases and similar arrangements(d) 0.5 0.5 0.0 0.0

GFS cash surplus(+)/deficit(-) -27.2 -44.1 -21.0 -31.0Per cent of GDP -1.7 -2.8 -1.3 -1.9

less Net Future Fund earnings 2.9 2.9 3.0 3.0

Underlying cash balance(e) -30.1 -47.0 -24.0 -33.9

Per cent of GDP -1.9 -3.0 -1.5 -2.1

Memorandum items:

Net cash flows from investments in financial

assets for policy purposes -10.0 -7.5 -12.6 -11.5

plus Net Future Fund earnings 2.9 2.9 3.0 3.0


PEFO MYEFO PEFO MYEFO$b $b $b $b

Cash receipts

Operating cash receipts 420.8 406.4 450.6 432.6

Capital cash receipts(b) 2.6 2.7 0.2 0.2

Total cash receipts 423.4 409.1 450.8 432.8

Cash payments

Operating cash payments 415.7 420.8 434.5 437.9

Capital cash payments(c) 9.2 9.3 8.8 9.2

Total cash payments 424.9 430.0 443.2 447.1

Finance leases and similar arrangements(d) 0.0 0.0 0.0 0.0

GFS cash surplus(+)/deficit(-) -1.5 -20.9 7.6 -14.3Per cent of GDP -0.1 -1.2 0.4 -0.8

less Net Future Fund earnings 3.2 3.1 3.4 3.4

Underlying cash balance(e) -4.7 -24.1 4.2 -17.7

Per cent of GDP -0.3 -1.4 0.2 -1.0

Memorandum items:

Net cash flows from investments in financial

assets for policy purposes -12.5 -10.7 -13.5 -11.5

plus Net Future Fund earnings 3.2 3.1 3.4 3.4


Estimates

Projections

2014-15

2015-16 2016-17

2013-14

(a) The numbers for PEFO were not published in the 2013 PEFO.(b) Equivalent to cash receipts from the sale of non-financial assets in the cash flow statement.(c) Equivalent to cash payments for purchases of non-financial assets in the cash flow statement.(d) The acquisition of assets under finance leases decreases the underlying cash balance. The disposal of assets

previously held under finance leases increases the underlying cash balance.(e) Excludes expected net Future Fund earnings.


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Table 3.4 provides a reconciliation of the changes in the underlying cash balance since

the 2013-14 Budget.

Table 3.4: Reconciliation of Australian Government general government sectorunderlying cash balance estimates

Estimates Projections

2013-14 2014-15 2015-16 2016-17

$m $m $m $m

2013-14 Budget underlying cash balance(a) -18,043 -10,888 849 6,591

Per cent of GDP -1.1 -0.6 0.0 0.4

Changes from 2013-14 Budget to 2013 PEFO

Effect of policy decisions(b) -374 -1,663 3,315 6,915

Effect of parameter and other variations -11,725 -11,429 -8,826 -9,307

Total variations -12,099 -13,093 -5,511 -2,392

2013 PEFO underlying cash balances(a) -30,142 -23,981 -4,662 4,199Per cent of GDP -1.9 -1.5 -0.3 0.2

Changes from 2013 PEFO to 2013-14 MYEFO

Effect of policy decisions(b)(c)

Receipts 1,674 -882 -2,976 -5,455

Payments 11,940 -227 -1,472 -4,180

Total policy decisions impact on underlying cash balance -10,266 -655 -1,505 -1,274

Effect of parameter and other variations(c)

Receipts -6,196 -6,680 -11,359 -12,531

Payments 462 2,600 6,609 8,082

less Net Future Fund earnings(d) -75 -9 -51 -20

Total parameter and other variations impact on

underlying cash balance -6,582 -9,272 -17,916 -20,592

2013-14 MYEFO underlying cash balance(a) -46,989 -33,907 -24,083 -17,668Per cent of GDP -3.0 -2.1 -1.4 -1.0

(a) Excludes expected net Future Fund earnings.(b) Excludes secondary impacts on public debt interest of policy decisions and offsets from the Contingency

Reserve for decisions taken.(c) A positive number for receipts indicates an increase in the underlying cash balance, while a positive

number for payments indicates a decrease in the underlying cash balance.(d) The movement in net Future Fund earnings is now shown separately.

Since the 2013 PEFO, total policy decisions have had a negative impact on theunderlying cash position of $10.3 billion in 2013-14 and by $13.7 billion over the

forward estimates.

Since the 2013 PEFO, total parameter and other variations have had a negative impacton the underlying cash position of $6.6 billion in 2013-14 and by $54.4 billion over theforward estimates.

The change in the projections assumption for the unemployment rate increases thenumber of unemployment benefit recipients in the projection period, and contributes

$3.7 billion to the deterioration in the budget bottom line since the 2013 PEFO over theforward estimates.


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In addition, changes to the terms of trade methodology reduce nominal GDP growth

over the projection period, and contribute to the deterioration in the budget bottomline by reducing tax receipts by around $2.0 billion over the forward estimates since

the 2013 PEFO.

Further details of the impact of policy decisions and major variations arising from

parameter and other variations on the fiscal outlook are provided in the receiptestimates and payment estimates sections below.

Receipt estimates

Total receipts are expected to be $4.5 billion lower in 2013-14 than estimated at the

2013 PEFO, tax receipts are $4.6 billion lower and non-tax receipts are $109 millionhigher. Since the 2013 PEFO, total receipts have been revised down by $7.6 billion over

the forward estimates due to new policy decisions, and revised down by $36.8 billionover the forward estimates due to parameter and other variations.


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Table 3.5: Australian Government general government sector cash receipts 2013-14

PEFO MYEFO

$m $m $m %

Individuals and other withholding taxes

Gross income tax withholding 160,600 157,200 -3,400 -2.1

Gross other individuals 33,700 34,000 300 0.9

less: Refunds 27,500 27,200 -300 -1.1

Total individuals and other withholding tax 166,800 164,000 -2,800 -1.7

Fringe benefits tax 4,160 4,090 -70 -1.7

Company tax 69,200 69,000 -200 -0.3

Superannuation fund taxes 7,620 6,860 -760 -10.0

Minerals resource rent tax(a) 850 500 -350 -41.2

Petroleum resource rent tax 2,410 1,750 -660 -27.4

Income taxation receipts 251,040 246,200 -4,840 -1.9

Goods and services tax 50,633 50,248 -385 -0.8Wine equalisation tax 760 740 -20 -2.6

Luxury car tax 380 400 20 5.3

Excise and customs duty

Petrol 5,850 5,850 0 0.0

Diesel 8,980 8,990 10 0.1

Other fuel products 3,800 3,820 20 0.5

Tobacco 8,320 8,350 30 0.4

Beer 2,390 2,360 -30 -1.3

Spirits 2,030 1,990 -40 -2.0

Other alcoholic beverages(b) 1,010 970 -40 -4.0

Other customs duty

Textiles, clothing and footwear 730 750 20 2.7

Passenger motor vehicles 930 930 0 0.0

Other imports 1,610 1,570 -40 -2.5

less: Refunds and drawbacks 260 260 0 0.0

Total excise and customs duty 35,390 35,320 -70 -0.2

Carbon pricing mechanism 6,475 7,180 705 10.9

Agricultural levies 461 459 -2 -0.4

Other taxes 2,971 2,933 -38 -1.3

Indirect taxation receipts 97,070 97,280 210 0.2

Taxation receipts 348,110 343,480 -4,630 -1.3

Sales of goods and services 8,686 8,626 -60 -0.7

Interest received 3,744 3,591 -153 -4.1

Dividends 2,748 2,883 135 4.9

Other non-taxation receipts 6,164 6,350 186 3.0

Non-taxation receipts 21,342 21,451 109 0.5

Total receipts 369,452 364,930 -4,521 -1.2

Memorandum:

Total excise 26,520 26,400 -120 -0.5

Total customs duty 8,870 8,920 50 0.6

Capital gains tax(c) 7,900 7,900 0 0.0

Medicare and DisabilityCare Australia levy(d) 9,960 9,950 -10 -0.1

Estimates Change on PEFO

(a) Net receipts from the minerals resource rent tax are expected to be $0.3 billion in 2013-14 which represents the

net receipts impact across different revenue heads. These include the offsetting reductions in company tax(through deductibility) and interactions with other taxes. The Government has announced the minerals resourcerent tax will not apply beyond 30 June 2014.

(b) Other alcoholic beverages are those not exceeding 10 per cent by volume of alcohol (excluding beer, brandyand wine).

(c) Capital gains tax is part of gross other individuals, company tax and superannuation fund taxes.(d) The Medicare and DisabilityCare Australia levy liabilities are reported in the year in which the income tax liability

is assessed.


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Table 3.6: Australian Government general government sector cash receipts 2014-15

PEFO MYEFO

$m $m $m %

Individuals and other withholding taxes

Gross income tax withholding 174,000 168,800 -5,200 -3.0

Gross other individuals 37,000 36,600 -400 -1.1

less: Refunds 28,300 28,000 -300 -1.1

Total individuals and other withholding tax 182,700 177,400 -5,300 -2.9

Fringe benefits tax 4,580 4,470 -110 -2.4

Company tax 70,100 70,500 400 0.6

Superannuation fund taxes 9,090 8,760 -330 -3.6

Minerals resource rent tax(a) 1,100 300 -800 -72.7

Petroleum resource rent tax 2,470 2,100 -370 -15.0

Income taxation receipts 270,040 263,530 -6,510 -2.4

Goods and services tax 53,559 52,948 -611 -1.1Wine equalisation tax 810 780 -30 -3.7

Luxury car tax 350 380 30 8.6

Excise and customs duty

Petrol 5,750 5,650 -100 -1.7

Diesel 9,180 9,180 0 0.0

Other fuel products 3,620 3,580 -40 -1.1

Tobacco 9,110 9,110 0 0.0

Beer 2,420 2,360 -60 -2.5

Spirits 2,160 2,090 -70 -3.2

Other alcoholic beverages(b) 1,060 990 -70 -6.6

Other customs duty

Textiles, clothing and footwear 580 600 20 3.4

Passenger motor vehicles 990 920 -70 -7.1

Other imports 1,680 1,600 -80 -4.8

less: Refunds and drawbacks 260 260 0 0.0

Total excise and customs duty 36,290 35,820 -470 -1.3

Carbon pricing mechanism 2,870 1,695 -1,175 -40.9

Agricultural levies 451 470 18 4.1

Other taxes 3,135 2,980 -155 -4.9

Indirect taxation receipts 97,466 95,073 -2,393 -2.5

Taxation receipts 367,506 358,603 -8,903 -2.4

Sales of goods and services 8,519 8,442 -77 -0.9

Interest received 3,646 3,544 -102 -2.8

Dividends 2,463 3,891 1,428 57.9

Other non-taxation receipts 8,170 8,263 93 1.1

Non-taxation receipts 22,799 24,140 1,341 5.9

Total receipts 390,305 382,743 -7,562 -1.9

Memorandum:

Total excise 27,040 26,640 -400 -1.5

Total customs duty 9,250 9,180 -70 -0.8

Capital gains tax(c) 10,700 10,700 0 0.0

Medicare and DisabilityCare Australia levy(d) 10,470 10,380 -90 -0.9

Estimates Change on PEFO

(a) Net receipts from the minerals resource rent tax are expected to be $0.2 billion in 2014-15 which represents the

net receipts impact across different revenue heads. These include the offsetting reductions in company tax(through deductibility) and interactions with other taxes. The Government has announced the minerals resourcerent tax will not apply beyond 30 June 2014.

(b) Other alcoholic beverages are those not exceeding 10 per cent by volume of alcohol (excluding beer, brandyand wine).

(c) Capital gains tax is part of gross other individuals, company tax and superannuation fund taxes.(d) The Medicare and DisabilityCare Australia levy liabilities are reported in the year in which the income tax liability

is assessed.


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Policy decisions

Policy decisions since the 2013 PEFO have increased total receipts by $1.7 billion in2013-14 and reduced total receipts by $7.6 billion over the forward estimates period.

The carbon tax and related measures will be repealed from 1 July 2014. This will

reduce receipts by $6.3 billion over the forward estimates period. This includesabolishing the carbon tax as well as the equivalent carbon price applied to syntheticgreenhouse gases, aviation fuels and liquid and gaseous fuels.

The minerals resource rent tax and most related measures will also be repealed by1 July 2014. The repeal of the minerals resource rent tax reduces receipts by $3.4 billion

over the forward estimates period relative to the 2013 PEFO. This is a net estimate,after allowing for the interaction between the minerals resource rent tax and other

taxes, such as company tax. However, the removal and rephasing of related taxconcessions that the minerals resource rent tax was intended to fund will increase

receipts by $5.7 billion over the forward estimates resulting in a net increase to receiptsover the forward estimates of $2.3 billion.

Australian Government MID-YEAR ECONOMIC AND FISCAL OUTLOOK 2013-14 (MYEFO) December 2013

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